The European Acid TestAs it stands at the moment, the Euro will be largely dependent on the fallout from four political events- the recent referendum in Italy, and the elections in the Netherlands, France and Germany. Italy?s situation has not improved since the global financial crisis despite low interest rates and an accommodative central bank. With the recent resignation from the Italian PM, Matteo Renzi following his defeat in a constitutional referendum, it is likely we will see an election in 2017. Many are also beginning to question if we?ll see the same populist wave that saw Trump elected as POTUS do the same in the upcoming Dutch and French elections. Geert Wilders who leads the PPV party in Netherlands and Marine Le Pen of the Front National in France are both in the lead in the latest opinion polls. Both Wilders and Le Pen will be looking to use lessons learnt from Trump and Brexit campaigns to drive engagement and popularity in their respective votes. Whilst I believe that centrist, status quo parties actually carry French and German elections, the Netherlands is more difficult to call at the moment. So it is my opinion that markets are overstating the longer-term political risk within Europe, but in the short term, I see significant weakness in the Euro, especially against the USD Issues of growth and inflation or the lack thereof in the Eurozone will also act as a persistent pressure moving forward and any moves by the European Central Bank to create either will give speculators another reason to sell. Parity in EURUSD is a common call in times of European angst so with a strong, Trump driven dollar and the political issues circling Europe, it seems probable for that price level to be reached sometime in 2017.
Emerging marketsAs the agenda in the US and to an extent the UK moves against internalisation, I expect a tougher regulatory environment for businesses in emerging markets who have benefitted from a decade of global productivity. Trump is not a fan of international trade as done through NAFTA, TTIP and the TPP deals and is set to take a combative stance in trading negotiations with countries both seen as rivals and those previously thought of as allies. On the campaign trail, Trump threatened to label China as a currency manipulator on his first day in office and provoke an instant 15% tariff on Chinese goods into the US for a period of 150 days. Such a measure is likely to warrant a response from Chinese authorities (sales of iPhones for example) and damage would be wrought on both economies. Once again I have little knowledge about Trump?s willingness to doggedly pursue these reforms once in office and risks remain that China will feel the need to meaningfully stimulate their economy via both additional fiscal spending and looser monetary policy despite concerns over their longer term effects.
Similarly, places like Singapore and Korea who rely on US funding and a free and easy trade environment will be particularly impacted by any drastic change in tack from a Trump presidency. Finally, I must turn to Mexico which will likely face more pressures than anywhere else; Trump?s trade policies are bully tactics and bullies pick on the weak (Mexico) more than the strong (China).
So what to expect? 2016 has set the foundations for 2017 in a way that few would have believed at the beginning of the year; the past 12 months has been a lesson in hubris and the danger of echo chambers. While the moves of the past year have been political, the moves of the upcoming 12 months will centre on the policies that these decisions and votes have heralded. If you are a business trading internationally, enter 2017 with caution, be aware of your risks and put the right processes in place to manage them effectively. I entered 2015 and 2016 cautiously optimistic, but 2017 is more a case of expectantly pessimistic. I hope I are proved wrong. Jeremy Cook is chief economist at World First.
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